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How Would the Implementation of a US Digital Currency Affect Forex Markets?

Earlier this year, former Chairman of the U.S. Commodity Futures Trading Commission, Christopher Giancarlo, founded the Digital Dollar Project. The aims of the project are simple: modernize financial infrastructure and create a digital currency.

Some experts believe that the move from a physical currency to a digital one will preserve the dollar’s role as the global reserve currency in the economy of the future; particularly as China’s influence in the digital sphere continues to grow.

Not only does China have over 120 patents on blockchain technology, but they also recently launched the digital yuan. As a result, some analysts believe that China’s seriousness about the implementation of digital currency systems may intensify US efforts to create a digital dollar.

Why a Digital Currency Benefits US and Global Economies

Should America embrace ecurrency, it will likely see a number of key benefits in the US economy, including the ability to deliver greater value and convenience for consumers at a lower cost. The creation of fully-scalable digital currency will also have global impacts. This is because, by allowing peer-to-peer exchange, digital currencies can remove the need for the bank to act as an intermediary in transactions, which can instead take place using automation.

In terms of the forex market specifically, digital dollars present a threat to the dominance of the dollar in a market where over $5 trillion is traded daily. As this guide that answers questions such as ‘how does trading work‘ outlines, the dollar supply is currently regulated by central banks, who control the value of a currency. However, with digital currencies, this may not necessarily be the case, depending on whether the currency is pegged to the physical dollar in terms of value.

However, for some analysts, the threat posed by digital currencies to the dominance of the dollar is overstated. For example, 20 years ago, people were saying the same thing about the euro. However, the euro’s threat has been modest at best, partially due to issues such as financial fragmentation, a lack of long-term stability in the Eurozone and inadequate governance.

Due to all of these issues, when we look at the EUR-USD live chart, we can see large amounts of volatility in the market as the euro has responded to challenges such as the UK’s Brexit deal, the bailout of Greece and issues over debt in Italy particularly.

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As a result, the introduction of a new ecurrency (whether that be the digital yuan or the digital dollar) probably isn’t enough to challenge the dominance of the dollar and create further market volatility in existing currency pairs, as these will still be affected chiefly by political events such as economic announcements and jobs figures.

In addition, many multi-national investors and businesspeople will likely stick with the physical dollar in the short term. This is because, for transitions made across traditional borders, many investors will still focus on liquidity, stability and convertibility (in which the physical dollar is king). On top of this, many will also have additional concerns over the technical superiority of the issuing country issuing digital money and hold fears about privacy and security in a digitized world.

How Likely Is It That We’ll See the Digital Dollar Come to Life?

China’s creation of the digital yuan has undoubtedly focused American minds, as many people see the battle between Chinese and American digitization as a battle for who owns the future.

Source: Pixabay

In terms of bringing digital money to life, the Digital Dollar Project has already begun to make strides, and the Federal Reserve have announced that they’re considering the option.

In addition, because key players like Mr. Giancarlo see the digital dollar sitting alongside traditional payment methods such as cash and credit cards, it appears as though we will see the creation of the digital dollar in the next 3-5 years. This view is bolstered by the fact that the currency’s creation doesn’t require the creation of a new banking system or a change in the role of the Federal Reserve System, which would both be barriers to formation.